Question

Growing Pains at Groupon Case

9. Groupon’s management needed significant cash to fund its growth. It had three options:(A) seek private investment, (B) sell the company to Yahoo! or Google, or (C) go public.

a. Contrast the financial reporting challenges across the three options.

b. In March 2012, Groupon’s auditors noted a material weakness in the company internal controls related to ‘‘deficiencies in the financial statement close process.’’ Would this disclosure have been made if Groupon had chosen options (A) or (B)?

Answer 1

(a): Financial reporting challenges in case the company seeks private investment - This option would have likely been the least challenging for Groupon from a financial reporting stand-point, as they likely already produced GAAP financial statements for the use of the current owners, creditors, and or managers.

Private investors may want to see these statements and make a decision based on that information, but it is highly unlikely that Groupon would be able to attract private investors that could raise the significant capital they were looking for to grow. Also, private investors would likely request additional information that would have to be created/provided by the finance staff.

Financial reporting challenges in case the company is sold to Yahoo or to Google - Another possible strategy that Groupon considered was merging with/ being acquired by Yahoo! or Google.   Usually, when a public company acquires a private company, the two companies’ financial results are consolidated. Also, the public company usually takes on the liabilities of the private company.

Companies looking to acquire another company take steps to determine whether the private company has implemented good corporate governance practices and sound financial reporting processes.   Public companies that acquire private targets will likely have standard operating procedures in place that can guide the less experienced private company in dealing with the SEC & complying with Sarbanes Oxley. This may reduce some of the burden on the financial reporting staff to figure it out for themselves.

Financial reporting challenges in case the company goes public - “Going Public” can create the need to modify or reorganize many corporate matters which are necessary for the SEC registration and create significant challenges from a financial accounting standpoint. The need to modify or change some company practices in order to comply with rules and regulations of the SEC & Sarbanes Oxley (which private companies are not subject to) is often referred to as “clean-up” or “housekeeping.”

With-out any guidance or experience of a company like Yahoo! or Google, the Groupon case proves that the pre-offering process can truly be a learning experience.

There are also significant costs and burdens after the initial filing.   Some of these items that will put additional burden on financial reporting are investor relations expense, administrative and compliance costs, filing of periodic company reports to the SEC, preparation and mailing of proxy materials prior to shareholder meetings, general duties related to timely disclosure of material information, none of which are required for privately held companies.

(b): This disclosure likely would not have been made if Groupon sought private investment. Private companies are not required to have management and the external auditor report on the adequacy of internal control on financial reporting. The reason is that this testing can be time-consuming and costly and may put too much of a burden on the company. Private companies do have a choice, so this disclosure may have been made, but it is unlikely.

Had Groupon been acquired by Yahoo! or Google, internal testing would have been required because they are both public companies already, however, it would have been a part of a larger consolidated audit, and Groupon may have adopted the internal control structure of its purchaser.